Hybrid cross-margining

ABSTRACT

A hybrid cross-margining system is disclosed. The disclosed provides for both joint accounts, maintained by multiple exchanges, as well as non-joint accounts, whereby the system recognizes both intra-account offsets within the joint account and inter-exchange offsets between the joint account and accounts maintained by another exchange to minimize the margin requirement of the associated market participant with respect to the positions reflected in these accounts.

REFERENCE TO RELATED APPLICATIONS

This application is a continuation under 37 C.F.R. §1.53(b) of U.S.patent application Ser. No. 11/452,673 filed Jun. 14, 2006 now U.S. Pat.No. 7,801,810, which claims the benefit of the filing date under 35U.S.C. §119(e) of U.S. Provisional Application Ser. No. 60/738,246 filedNov. 18, 2005, the entire disclosures of which are hereby incorporatedby reference.

BACKGROUND

Typically, an Exchange, such as the Chicago Mercantile Exchange (“CME”),provides a “clearing house” which is a division of the Exchange throughwhich all trades made must be confirmed, matched and settled each dayuntil offset or delivered. The clearing house is an adjunct to theExchange responsible for settling trading accounts, clearing trades,collecting and maintaining performance bond funds, regulating deliveryand reporting trading data. Clearing is the procedure through which theClearing House becomes buyer to each seller of a futures contract, andseller to each buyer, and assumes responsibility for protecting buyersand sellers from financial loss by assuring performance on eachcontract. This is effected through the clearing process, wherebytransactions are matched. A clearing member is a firm qualified to cleartrades through the Clearing House. The CME Clearing House clears,settles and guarantees all matched transactions in CME contractsoccurring through its facilities. In addition, the CME Clearing Houseestablishes and monitors financial requirements for clearing members andconveys certain clearing privileges in conjunction with the relevantexchange markets.

The Clearing House establishes clearing level performance bonds(margins) for the products of the Exchange and establishes minimumperformance bond requirements for customers of Exchange's products. Aperformance bond, also referred to as a margin, is the funds that mustbe deposited by a customer with his or her broker, by a broker with aclearing member or by a clearing member with the Clearing House, for thepurpose of insuring the broker or Clearing House against loss on openfutures or options contracts. This is not a part payment on a purchase.The performance bond helps to ensure the financial integrity of brokers,clearing members and the Exchange as a whole. The Performance Bond toClearing House refers to the minimum dollar deposit which is required bythe Clearing House from clearing members in accordance with theirpositions. Maintenance, or maintenance margin, refers to a sum, usuallysmaller than the initial performance bond, which must remain on depositin the customer's account for any position at all times. The initialmargin is the total amount of margin per contract required by the brokerwhen a futures position is opened. A drop in funds below this levelrequires a deposit back to the initial margin levels, i.e. a performancebond call. If a customer's equity in any futures position drops to orunder the maintenance level because of adverse price action, the brokermust issue a performance bond/margin call to restore the customer'sequity. A performance bond call, also referred to as a margin call, is ademand for additional funds to bring the customer's account back up tothe initial performance bond level whenever adverse price movementscause the account to go below the maintenance.

Exchanges, such as, CME, derive their financial stability in large partby removing debt obligations among market participants as they occur.This is accomplished by determining a settlement price at the close ofthe market each day for each contract and marking all open positions tothat price, referred to as “mark to market.” Every contract is debitedor credited based on that trading session's gains or losses. As pricesmove for or against a position, funds flow into and out of the tradingaccount. Debt obligations from option contracts are also immediatelyremoved, since the purchaser of an option must pay the premium (cost ofthe option) in full at the time of purchase. Sellers of options postperformance bonds, discussed above, as determined by the Exchangeaccording to the prevailing risk characteristics of the options sold. Inthe case of the CME, each business day by 6:40 a.m. Chicago time, basedon the mark-to-the-market of all open positions to the previous tradingday's settlement price, the Clearing House pays to or collects cash fromeach clearing member. This cash flow, known as settlement variation, isperformed by CME's settlement banks based on instructions issued by theClearing House. All payments to and collections from clearing membersare made in “same-day” funds. In addition to the 6:40 a.m. settlement, adaily intra-day mark-to-the market of all open positions, includingtrades executed during the overnight GLOBEX®, the CME's electronictrading systems, trading session and the current day's trades matchedbefore 11:15 a.m., is performed using current prices. The resulting cashpayments are made intra-day for same day value. In times of extremeprice volatility, the Clearing House has the authority to performadditional intra-day mark-to-the-market calculations on open positionsand to call for immediate payment of settlement variation. Settlementvariation payments through the Clearing House average $1.4 billion perday and have reached a peak of $6.4 billion. CME's mark-to-the-marketsettlement system stands in direct contrast to the settlement systemsimplemented by many other financial markets, including the interbank,Treasury securities, over-the-counter foreign exchange and debt,options, and equities markets, where participants regularly assumecredit exposure to each other. In those markets, the failure of oneparticipant can have a ripple effect on the solvency of the otherparticipants. Conversely, CME's mark-to-the-market system does not allowlosses to accumulate over time or allow a market participant theopportunity to defer losses associated with market positions.

If a clearing member does not have sufficient performance bondcollateral on deposit with the Clearing House, then the clearing membermust meet a call for cash performance bond deposits by 6:40 a.m. and/orby 2:00 p.m. Chicago time, which results in a direct debit to theclearing member's account at one of CME's settlement banks.

In order to minimize risk to the Exchange while minimizing the burden onmembers, it is desirable to approximate the requisite performance bondor margin requirement as closely as possible to the actual positions ofthe members at any given time. Accordingly, there is a need to improvethe accuracy and flexibility of the mechanisms which estimateperformance bond requirements.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 depicts a block diagram of one embodiment of the disclosed hybridcross margining system.

FIG. 2 depicts a flow chart showing operation of the disclosed hybridcross margining system.

FIG. 3 depicts a block diagram showing an exemplary implementation ofthe system of FIG. 1.

FIGS. 4A-4G depict block diagrams of a Flexible Hybrid CentralCounter-party Cross-Margining or Cross Collateralization systemaccording to one embodiment.

DETAILED DESCRIPTION

While the disclosed embodiments will be described in reference to theCME, it will be appreciated that these embodiments are applicable to anyExchange, including those which trade in equities and other securities.To clarify the use in the pending claims and to hereby provide notice tothe public, the phrases “at least one of <A>, <B>, . . . and <N>” or “atleast one of <A>, <B>, . . . <N>, or combinations thereof” are definedby the Applicant in the broadest sense, superseding any other implieddefinitions herebefore or hereinafter unless expressly asserted by theApplicant to the contrary, to mean one or more elements selected fromthe group comprising A, B, . . . and N, that is to say, any combinationof one or more of the elements A, B, . . . or N including any oneelement alone or in combination with one or more of the other elementswhich may also include, in combination, additional elements not listed.

Cross-margining is a method of offsetting risk among multiple exchangeswhich recognizes that a given market participant, e.g. a trader, mayhave offsetting positions at more than one exchange. For the variouspositions held by the market participant, each exchange has its ownmargin requirements based on the participant's positions held at thatexchange which recognize offsetting positions therein. However, as eachexchange is a separate entity which independently tracks and accountsfor positions, the market participant is required to satisfy the marginrequirements of each exchange separately. The separation of exchangesmay be due to myriad of business and regulatory considerations. Thesemargin requirements may present a significant burden on the marketparticipant, as has been described. Cross-margining mechanisms may beused to provide a way to recognize offsetting positions acrossexchanges, potentially resulting in a lower overall margin burden on themarket participant, while satisfying the needs of the participatingexchanges to minimize the risk of loss. Cross-margining mechanisms aretypically implemented by contractual agreements between exchanges. Theseagreements provide rules as to how margin requirements will bedetermined and how each participating exchange will receive theirapportioned amount of the overall margin requirement of the marketparticipant. As will be described, these rules may specify or lendthemselves to implementation via communications links between theexchanges and logic which monitors transactions and accounts andperforms the requisite determination of the overall margin requirementfor the market participant, thereby directing the flow of marginpayments, appropriately apportioned, to each participating exchange tosatisfy the individual margin requirements.

Generally, market participants trade products at multiple exchanges,including products which may have some form of correlation as to therisk of loss, e.g. a spread such as long and short positions on the samecommodity. Where the products are traded on the same exchange, the riskmanagement mechanisms of the exchange would recognize this “marginable”correlation in the computation of the margin requirement, offsetting oneposition against the other and, thereby, reducing the margin requirementfor the market participant. Where the products are traded on differentexchanges, the disclosed cross-margining mechanisms attempt to recognizethe marginable correlation as will be described.

One method of cross-margining, referred to as the “one bucket” or “onepot” approach or model, relies on a joint account created specificallyfor cross-margining among two or more exchanges, the joint account beingmaintained separately from exchange-exclusive accounts and reflectingpositions resulting from trades of products from any of theparticipating exchanges. For example, in recognition of the growinglinkages among the markets for exchange-traded equity derivativeproducts, as well as the need to promote efficient clearing proceduresand to focus on the true intermarket risk exposure of clearing members,CME, in conjunction with other exchanges, such as the Options ClearingCorporation (OCC) and the New York Clearing Corporation (NYCC), hasdeveloped a cross-margining system with respect to market professionalsand proprietary accounts. Cross-margining allows participating clearingcorporations to recognize Clearing Members' inter-market hedges acrossthe respective products they clear. By combining the positions of jointor affiliated clearing members in certain broad-based equity indexfutures and options into a single portfolio, and utilizing thesophisticated risk-based systems of each clearing organization, a singleperformance bond requirement across both markets is determined.Participating clearing corporations work together to the benefit of theClearing Members. The clearing organizations jointly hold a first lienon and security interest in the positions in cross-margined accounts.All performance bond deposits associated with these accounts are jointlyheld. The cross-margining system significantly enhances both theefficiency and financial integrity of the clearing system by treatingall positions as being held in the same account, which allows gainsaccruing to futures or options positions to be immediately available tomeet the requirements for funds from losing positions. This systemutilizes a risk-based portfolio methodology. The system is derived fromthe actual risk of inter-market hedged positions after combiningClearing Members' related options and futures positions and reducesparticipating Clearing Members' combined margin requirements, if hedged.Further, the system provides for greater liquidity through netsettlements, enhances the financial integrity of participating clearingorganization's clearance and settlement systems and reduces systematicrisk. In the event that a clearing organization suspends across-margining member, the positions in the cross-margin accounts wouldbe liquidated and all performance bond collateral would be converted tocash and applied toward each clearing organization's costs ofliquidating the cross-margin accounts. CME, the OCC and the NYCC areeach entitled to proportional shares of any surplus to apply towardother obligations of the clearing member; if one clearing organizationdid not need its entire share of the surplus, the excess would be madeavailable to the other clearing organizations.

The joint account of the one bucket model results in immediate positionnetting which prevents the participant from maintaining spreads withother products, not included in the cross-margining system, provided bythe individual exchanges, i.e. spread eligible positions are isolatedand the participants, with respect to the joint account, are limited totrading specific products that the participating exchanges agree tocross margin and other products cannot be mixed in.

In the one bucket model, exchanges agree to create a special singlejoint account in which the correlated products of the various exchangesare traded by the market participant, i.e. the account reflectspositions resulting from trades in products at the participatingexchanges which have a marginable correlation. This joint account hasits own margin requirement. From the market participant's perspective,there exists a single account for margins (money movement) and trades(transaction records, etc.), i.e. a virtual exchange. In such a model,any offsetable positions at the two locations/exchanges get forced intoone account and all nettable positions are immediately recognized. Eachexchanges' own internal risk-offsetting spreads are avoided because theindividual positions (eligible for cross margining) are isolated intothe joint account and taken away. This has the effect of concentratingrisk offsets of two separate exchanges and maximizes risk offsets.

Another method of cross-margining, referred to as the “two bucket” or“two pot” approach or model, relies on an agreement among participatingexchanges to recognize offsetting positions between the individualaccounts maintained by each participating exchange. For example, CMEalso maintains other cross-margin agreements with other Exchanges, suchas the London Clearing House and Fixed Income Clearing Corporation.These programs may involve the cross-margining of selected interest rateproducts. The design of these two cross-margin programs differ from theabove mentioned OCC/NYCC program in that performance bond collateral isheld separately at each respective clearing organization. As opposed tothe one bucket model, the two bucket model recognizes all internalexchange spreads first before looking across exchanges. In the eventthat a clearing organization suspends a CME/LCH cross-marginingparticipant, the cross-margined positions would be liquidated andperformance bond collateral would be converted to cash at eachrespective clearing organization. If as a result of the liquidation ofcross-margined positions and performance bond there is a resultingcross-margin loss, there will be a cross-margin guarantee payment fromone clearing organization to the other to share the loss. A similarlystructured cross-margin program is in place between CME and NYMEX forNYMEX energy products versus CME's commodity index complex.

In the two bucket model, there is no joint account as in the one bucketmodel. Instead, the exchanges agree to recognize risk offsets off oftheir own accounts. Accordingly, the market participant still hasmultiple accounts, but their margin requirements at each exchange areadjusted based on the exchanges recognition of risk offsetting positionsat the other exchanges. This results in less margin demand on thetrader. In operation, exchange specific/internal spreads are recognizedfirst and then offsets between the participating exchanges arerecognized.

The benefit of the one bucket model is that it requires all deltaposition to be offset at 1 centralized location which translates togreater risk offsetting. This will use maximum available delta in theeligible positions for risk-offsetting. It brings more efficiency tohighly correlated products/positions in a 1 bucket spreading model. Inother words, the performance bond savings amount will be much greaterthan the 2 bucket model since the risk offset eligible deltas from twoseparate (or multiple) exchange/clearing organizations can beconcentrated into 1 bucket without the normal process of theirrespective existing intra or inter-commodity spreads taking priority.Operationally, it is easier to maintain the risk offset rules and ratessince the 1 bucket model works as one virtual centralized clearingsystem despite the fact that position deltas originate from two separate(or multiple) exchanges/clearing organizations.

The benefit of the two bucket model is the flexibility in managing theperformance bond collateral policies compared to the 1 bucket modelsince the policy will be controlled by the respective exchanges based ontheir own business decisions. This avoids legal and operationalcomplexities of establishing and maintaining joint margin accounts fortwo separate or multiple legal entities/exchanges/clearingorganizations, Further, there is no significant operational impact tothe participating clearing member firms since the entire 2 bucketcross-margin process is streamlined into its normal processing at therespective exchanges/clearing organizations.

Accordingly, the one bucket model offers greater efficiency and amountin savings of performance bond requirement. However, it is expensive tooperate for all participants and may be legally complicated (especiallydealing with international exchanges under different regulatoryregimes). The two bucket model offers ease of execution/implementation,and is generally inexpensive to operate for all participants with theexpense of much less savings and efficiency of performance bondrequirement. Additionally, it may also be less legally complicated fromregulatory perspective. In situations involving highly correlatedproducts and the desire to recognize greater risk-offsets in exchangefor operational complexities, the one bucket model is preferred.Alternatively, if the provision of some savings in the performance bondis preferred without incurring expensive operational and systemimplementation costs for both the users and providers, the two bucketapproach is preferred.

While an exchange may elect to implement a 1 bucket model or a 2 bucketmodel with another exchange, the disclosed embodiments relate to ahybrid of the 1 and 2 bucket models. The disclosed hybridcross-margining system handles participants that deal with more than twoexchanges and consolidates the exchange space without requiring that theexchanges merge into a single organization. This may be useful, forexample, in situations where all of the participating exchanges cannotjoin together as a single organization, such as for regulatory reasons.Further, the disclosed embodiments are applicable beyond futures to anymarkets that require any type of collateral movement or any type ofvariation/mark to market movement. Further, the disclosed embodimentsare application to any instruments that can be converted to novation.i.e. permit the substitution of the clearing house for the oppositecontracting party, and as long as they are correlated, they can beoffset in this model.

In the disclosed hybrid cross margining system, the dedicated jointaccount (of the one bucket model) is augmented with flexibility tospread anything left over in the joint account against another exchange(as in two bucket model). Effectively, the disclosed embodiments createa virtual exchange which includes both one or more joint accounts andone or more inter-exchange risk offset recognition agreements. Incalculating the overall margin requirement for the market participant,the positions in the joint accounts may be offset against each otherfirst to the extent possible, and then inter-exchange risk offset isaccounted for in any remaining un-netted positions. In an alternativeembodiment, inter-exchange offsets may be accounted for first, with anyun-netted positions then being offset against available positions withinthe joint account.

In one embodiment, shown in FIG. 4A, Flexible Hybrid CentralCounter-party Cross-Margining or Cross Collateralization is supported.In particular, one-bucket and two-bucket cross-margining orcollateralization processes are combined into a single streamlinedprocess. Cross-Margining or Cross-Collateralization allows for areduction in margin or collateral amount requirements for trading ineither OTC or exchange traded derivatives markets. This reduction ispossible because assessed risk is reduced when offsetting (risk-offsetor “Spreadable”) positions are cleared by the same or affiliated“clearing members” or market participant firms at the cross-marginparticipating central-counterparty clearing organization(s).

In the present embodiment, both one-bucket and two-bucketcross-margining or collateralization processes are combined into a onestreamlined and single process by combining ‘One-pot Approach’ and‘Two-pot Approach’ to support both OTC and exchange traded derivativesclearing transactions. Process 1: 1 Pot Approach is initially achievedwith two or multiple partnering parties. Process 2: 2 Pot Approach isachieved with one or multiple partnering parties dealing withrisk-offset eligible positions after the process 1 is done.

Referring to FIGS. 4B and 4C, the 1 Pot Approach is shown:

-   -   Clearing Transactions Scope Participants: clearing members of        exchange or counter-parties in the OTC market.    -   Multiple contracts or products of all types (both OTC and        exchange traded) at different exchanges or counter-parties.    -   All Cross-Margin Activity=Joint Cross-Margin/collateral Account.        -   Identified with a Separated into Cross-Margin Origin.        -   It is separate from participant's normal clearing at            respective clearing organizations, entities or            counter-parties.    -   Only ALLOW Cross-Margin/Collateral Eligible Trades to Clear in        the Joint Cross-Margin/Collateral Accounts.        -   Trades executed directly into the Cross-Margin Accounts.        -   Positions can be transferred between a normal Clearing            Account and Cross-Margin Clearing/Collateral Account.        -   Separate Position Records/Data is submitted for the            Cross-Margin process Origin.    -   Banking Settlement or collateralization only Dedicated to the        Joint Cross-Margin Accounts        -   Treated as Separate Origin.        -   Separate Bank Accounts, Wires, Transactions, etc.

Referring to FIG. 4D, the 2 Pot Approach is shown:

-   -   Transactions of Participating Clearing Organizations=Occurs at        Each Clearing Org.+Offset Risk=2 Pot.    -   No Joint Cross-Margin Accounts        -   No Separation from Clearing Member's Primary Clearing            Account at respective clearing organizations.        -   Hold Collateral in the Same Separate Firm Accounts.    -   Each Participating Organization Calculates its performance bond        requirements, Offset and Share Offset, Gain & Loss Guarantee        Information.        -   Positions Remain at each participating organization origin.        -   No Need for Position Transfer into Cross-Margin Account        -   No Separate Position Change Submission (PCS) report is            Needed    -   Transparent Transaction        -   For example:            -   CME offers credit on cross-margin eligible contracts for                offsetting positions at the opposite clearing                organizations            -   Opposite Clearing Org. will offer credits on their                positions.        -   No Dedicated Banking Settlement for Cross-Margin Purposes            -   No Separate Bank Accounts, Wires, Transactions, etc.            -   Transactions become part of current banking                transactions.

In the 2 Pot approach, Cross-Margin Offsets are Calculated as follows:

-   -   Internal Process for Cross-Margin Eligible Product:    -   1. Do all Internal Intra-Commodity Spreading.    -   2. Do all Internal Inter-Commodity Spreading.    -   3. Look at the available cross-margin delta positions at other        clearing organizations to see if additional spreads could be        formed from CME's remaining delta positions.    -   4. Allocate Prioritized Spread Credit to each Clearing        Organization        -   i.e. Multiple organization cross-margin program.        -   Assign Priority from Highest to Lowest spread credit amounts            based on the information from other participating clearing            organizations.        -   Calculate the Spread Allocation based on the priority.

FIG. 4E shows the process for dealing with positions that were notoriginally offset. FIG. 4F shows how cross-margining utilizes X-marginmargin that was not offset. FIG. 4G demonstrates how cross-marginingmatches positions of similar absolute risk at two or more clearingorganizations.

Allocation of Savings on Proportional Basis:

-   -   Cross-Margining with Multiple Organizations,        -   Allocation of its Positions and Margin necessary        -   Allocations Will Optimize Members' Margin Reductions            -   Amounts are First Allocated to Products With Best                Correlations            -   If Equally Correlated, Allocations Are Pro-Rata Based on                Margin Amounts Submitted by Each Clearing Organization

Exchange CME LCH GSCC Eligible Contract Eurodollar Euribor Treasury Eq.Eligible Delta 1000 −700 −500 Spread Credit % 80% 35% Spreads Formed1000 −700 −300 Remaining Delta 0 0 −200

The 2 pot approach offers the advantages of: flexibility in managingcollateral is unaffected using “Two Pot” Approach; avoids legal andoperational complexities of establishing and maintaining joint marginAccounts in a multiple-clearing organization cross marginingenvironment; the ability to pledge margin collateral for liquiditypurposes is unaffected; and there is no operational impact except inperforming an audit trail.

Referring to FIG. 1, there is shown a block diagram of one embodiment ofthe disclosed hybrid cross margining system 100. In the disclosed system100, a market participant, such as a trader 102, interacts with multipleexchanges 104A, 104B, 104C, 104D, e.g. places one or more orders fortrades of the various products offered by the exchanges 104A, 104B,104C, 104D. Each of the exchanges 104A, 104B, 104C, 104D maintainsaccounts 110A, 110B, 110C for the trader 102 which reflect the positionsresulting from the execution of the trader's trades on the particularexchange 104A, 104B, 104C, 104D for the specified products. In general,these accounts 110A, 110B, 110C are specific/exclusive to the particularexchange 104A, 104B, 104C, 104D and do not reflect the transactionsexecuted by the trader 102 at other exchanges 104A, 104B, 104C, 104D.Because these accounts 110A, 110B, 110C are maintained separately, thepositions within each account 110A, 110B, 110C are typically not capableof being offset against positions in the other accounts 110A, 110B,110C. According to one aspect of the disclosed embodiments, therefore, ajoint account 106 is provided, by agreement of the exchanges 104A, 104Band the trader 102, which is capable of reflecting the trading activityof the trader 102 at multiple exchanges 104A, 104B, as was discussedabove in relation to the one bucket model. As the various positions ofthe associated exchanges 104A, 104B are consolidated into a singleaccount 106, any intra-account offsetting positions can be recognized tominimize the associated margin requirement for the account 106. It willbe appreciated that the process of recognizing offsetting positionswithin the joint account may be performed continuously or at specifiedintervals, such as after the participating exchanges close for businesson a given day. Continuous recognition of offsetting positions may beprovided to allow the market participant to monitor their marginrequirements as a function of their trading activity and makeadjustments thereto if desired. Further, according to the disclosedembodiments, a relationship 116 is established between multipleexchanges 104A, 104B, 104C, 104D, such as between exchange A 104A,exchange B 104B and exchange C, 104C, for the purpose recognizinginter-exchange offsetting positions, as was discussed above for the twobucket model. This permits, for example, offsetting positions as betweenthe joint account 106 and the account 108 maintained at the relatedexchange 104C. In an alternate embodiment, the account 108 may furtherbe a joint account 108 itself which reflects positions resulting fromtrades at multiple exchanges 104C and 104D. It will be appreciated thatthe process of recognizing offsetting positions between accounts may beperformed continuously or at specified intervals, such as after theparticipating exchanges close for business on a given day. Continuousrecognition of offsetting positions may be provided to allow the marketparticipant to monitor their margin requirements as a function of theirtrading activity and make adjustments thereto if desired. In oneembodiment, cross-margining mechanisms 112 recognize intra-accountoffsetting positions first and then inter-exchange offsetting positions.This results in the determination of an overall margin requirement 114.In an alternate embodiment, the cross-margining mechanisms 112 recognizeinter-exchange offsetting positions first and then intra-accountpositions to determine the overall margin requirement 114. In eachembodiment, the un-netted balance of positions which are not completelyoffset via the first offsetting mechanism may be then offset via thesecond offsetting mechanism. Thereby, the disclosed hybridcross-margining system further minimizes the requisite marginrequirement by recognizing additional offsetting positions whichotherwise would not be available. Where each account 106, 108 may have aparticular margin requirement, the overall margin requirement 114computed by the disclosed embodiments will not be more than the sum ofthe individual margin requirements, assuming no inter-exchangeoffsetting positions are available. It will be appreciated that thenumber of exchanges which may be related via either the joint account(one bucket) or the inter-exchange agreement (two bucket), is notlimited, and may vary based on implementation with respect to theexchanges 104A, 104B, 104C, 104D and/or with respect to the trader 102.For example, different traders 102 or different exchanges 104A, 104B,104B, 104D may have different agreements in place specifying differentparameters or participating exchanges for the joint accounts and/orinter-exchange relationships. It will be appreciated that the process ofdetermining the overall margin requirement may be performed continuouslyor at specified intervals, such as after the participating exchangesclose for business on a given day. Continuous determination of theoverall margin requirement may be provided to allow the marketparticipant to monitor their margin requirements as a function of theirtrading activity and make adjustments thereto if desired, despite thatthe actual margin requirement expected to be met by the marketparticipant is determined at a particular time.

FIG. 2 depicts a flow chart showing operation 200 of the disclosedhybrid cross margining system. In operation, the disclosed systemdetermines a minimal margin requirement 114 for a market participant,such as a trader 102. The process 200 includes maintaining, by a firstexchange 104A and a second exchange 104B different from the firstexchange, a first account 106 for the market participant 102 (block204). It will be appreciated that additional exchanges may also beincluded as described. The first account 106 reflects a first pluralityof positions resulting from a first one or more trades executed on thefirst exchange 104A for one or more products available from the firstexchange 104A, a second one or more trades executed on the secondexchange 104B for one or more products available from the secondexchange 104B, or combinations thereof. As the first account 106reflects positions from both the first and second exchanges 104A, 104B,it may be referred to as a joint account. The first account 106 ismaintained separately from other accounts 110A maintained by the firstexchange 104A which are only capable of exclusively reflecting positionsresulting from trades executed by the first exchange 104A. The firstaccount 106 is further maintained separately from other accounts 110Bmaintained by the second exchange 104B which are only capable ofexclusively reflecting positions resulting from trades executed by thesecond exchange 104B. In one embodiment, at least a subset of the firstand second plurality of positions are characterized by a marginablecorrelation. Alternatively, the first account 106 may be limited toreflecting positions resulting from cross-margin eligible trades. To themarket participant 102, the first account appears to be maintained by avirtual exchange comprised of the participating individual exchanges104A, 104B. While the first account 106 is maintained separate fromother accounts 110A, 110B at the exchange, in one embodiment, the marketparticipant 102 is permitted to transfer one or more of the firstplurality of positions to one of the other accounts 110A, 110Bmaintained by the first exchange 104A or the second exchange 104B.

The process 200 continues with determining a first net position based onthe first plurality of positions reflected in the first account 106(block 208) by recognizing intra-account offsetting positions, such asintra-commodity spreads and/or inter-commodity spreads.

Further, the process 200 includes maintaining, by a third exchange 104C,a second account 108 for the market participant 102 (block 206). Thesecond account 102 reflects a second plurality of positions resultingfrom a third one or more trades executed on the third exchange 104C forone or more products available from the third exchange 104C. In oneembodiment, the third exchange 104C is different from first and secondexchanges 104A, 104B. In an alternative embodiment, the third exchange104C may be the same as one of the first and second exchanges 104A,104B, wherein the second account 108 comprises one of the separate otheraccounts 110A or 110B held by the market participant 102. In analternative embodiment, the second account 108 may further be a jointaccount, i.e. the second account 108 is further maintained by a fourthexchange 104D. In this embodiment, the second plurality of positionsfurther includes positions resulting from a fourth one or more tradesexecuted on the fourth exchange 104D for one or more products availablefrom the fourth exchange 104D. Further, similar to the first account106, the second account 108 is maintained separately from other accounts110C maintained by the third exchange 104C which are only capable ofexclusively reflecting positions resulting from trades executed by thethird exchange 104C and the second account 108 is maintained separatelyfrom other accounts (not shown) maintained by the fourth exchange 104Dwhich are only capable of exclusively reflecting positions resultingfrom trades executed by the fourth exchange 104D.

According to the process 200, a second net position is determined basedon the second plurality of positions reflected in the second account 108(block 210) by recognizing intra-account offsetting positions, such asintra-commodity spreads and/or inter-commodity spreads. The second netposition may be determined before, after or concurrently with thedetermination of the first net position.

Further, a third net position is determined based on the first pluralityof positions reflected in the first account and the second plurality ofpositions reflected in the second account (block 218) via recognition ofthe inter-exchange offsetting positions, such as intra-commodity spreadsand/or inter-commodity spreads. The third net position may be determinedprior to, subsequent to or concurrently with the first and/or second netpositions. Where the determining of the first or second net positionsmay result in un-netted positions, the determining of the third netposition may further include netting these un-netted positions.

The process 200 further includes establishing a relationship 116 betweenthe participating exchanges 104A, 104B, 104C, 104D (block 212) and,optionally, the market participant 102. This relationship may beestablished via contractual agreement and may be established in advanceof, or concurrently with, the process by which the minimal marginrequirement 114 is computed. In one embodiment, the relationship definesthe parameters by which the margin require is determined, e.g. whichexchanges 104A, 104B, 104C, 104D may participate, what products areeligible, which accounts 106, 108 are eligible, how are offsettingpositions recognized and in what order as to intra-account andinter-exchange recognition.

Finally, based on the established relationship, and the first, secondand third net positions, the minimal margin requirement 114 isdetermined for the market participant 102 (block 214). This is theamount, allocated to each participating exchange 104A, 104B, 104C, 104D,that the market participant 102 must post to cover the risk of losscreated by the various positions held in the accounts 106, 108. Thecomputation of the minimal margin requirement may include determining afirst margin requirement for the first account 106, based onintra-account offsetting and the determining a second marginrequirement, based on intra-account offsetting, for the second account108, wherein the minimal margin requirement is not more than the sum ofthe first and second margin requirements, since additionalinter-exchange offsetting may be available. Alternatively, as wasdiscussed, inter-exchange offsets may be recognized before intra-accountoffsets.

FIG. 3 depicts a block diagram showing an exemplary implementation ofthe system of FIG. 1. The system 300 may be implemented in one or morecomputer systems, including one or more processors, memories andsuitable software, interconnected with the systems of the participatingexchanges 104A, 104B, 104C, 104D via suitable communications links,which may include wired or wireless connections, or combinationsthereof. In one embodiment, the various components described herein areimplemented in hardware, software or a combination thereof, such aslogic stored in a memory and executable by one or more processors toimplement the requisite functionality. It will be appreciated that oneor more of the components of the system 300 may be maintained by one ormore of the participating exchanges 104A, 104B, 104C, 104D or by a thirdparty, and suitable interconnected as described above. Further,components maintained by a particular exchange 104A, 104B, 104C, 104Dmay be integrated with. or separate from, the exchange's 104A, 104B,104C, 104D other systems. For example, the various accounts for use withthe disclosed embodiments may be maintained by a particular exchange104A, 104B, 104C, 104D as part of their normal accounts database or theymay be maintained in a separate database.

The system 300 for determining a minimal margin requirement 114 for amarket participant 102 includes a first account 106, stored in a firstdatabase 302 and maintained for the market participant 102 by a firstexchange 104A and a second exchange 104B different from the firstexchange 104A. In one embodiment, the first account 106 includes a datastructure which stores all of the account parameters and permits reviewand modification of those parameters. The first account 106 reflects,i.e. stores data reflecting, a first plurality of positions resultingfrom a first one or more trades executed on the first exchange 104A forone or more products available from the first exchange 104A, a secondone or more trades executed on the second exchange 104B for one or moreproducts available from the second exchange 104B, or combinationsthereof. As the account 107 reflects positions generated from more thanone exchange 104A, 104B, the account 107 maybe referred to as a jointaccount. The first account 106 is maintained separately, e.g. in aseparate database or data structure, from other accounts 110A maintainedby the first exchange 104A which are only capable of exclusivelyreflecting positions resulting from trades executed by the firstexchange 104A. The first account 106 is further maintained separatelyfrom other accounts 110B maintained by the second exchange 104B whichare only capable of exclusively reflecting positions resulting fromtrades executed by the second exchange 104B. The system 300 is furthercoupled with the participating exchanges 104A, 104B, 104C, 104D so as tobe able to access account information and receive data regarding accountpositions resulting from trades executed by market participant 102.Herein, the phrase “coupled with” is defined to mean directly connectedto or indirectly connected through one or more intermediate components.Such intermediate components may include both hardware and softwarebased components. In one embodiment, the system 300 is coupled with theexchanges 104A, 104B, 104C, 104D via a network, such as a wired network,wireless network, or combination thereof. Further, the exchanges 104A,104B, 104C, 104D, may include an application program interface (“API”)coupled with the network which facilitates the requisite data access. Inone embodiment, the system 300 includes first logic, such as databasemanagement logic and associated data structures, stored in a firstmemory and executable by a first processor, coupled with the firstmemory to maintain the first account 106 for the market participant 102.As described above, the joint accounts of the disclosed embodiments aremaintained separately from the non-joint accounts, however, a positiontransmitter (not shown) may be provided which is operative to allow amarket participant to transfer one or more of the first plurality ofpositions to one of the other accounts maintained by the first exchangeor the second exchange.

The system 300 further includes a first net position calculator 306coupled with the first database 302 and operative to determine a firstnet position based on the first plurality of positions reflected in thefirst account 106, such as by recognizing intra-commodity spreads and/orinter-commodity spreads. The first net position calculator 306 may bimplemented as second logic, coupled with the first logic, stored in thefirst memory and executable by the first processor to determine thefirst net position as described. For example, the first net-positioncalculator 306 may include computer program logic operative to scan thedata structure of a particular account and identify offsettingpositions. Once identified the computer program logic of the firstnet-position calculator 306 computes the first net position based on thevalue of the identified offsetting positions found in the datastructure. As was described above, the first net position calculator 306may operate periodically or continuously to determine the first netposition.

The system 300 also includes a second account 108, stored in a seconddatabase 304 and maintained by a third exchange 104C for the marketparticipant 102, the second account 108 reflecting a second plurality ofpositions resulting from a third one or more third executed on the thirdexchange 104C for one or more products available from the third exchange104C. In one embodiment, the second account 108 includes a datastructure which stores all of the account parameters and permits reviewand modification of those parameters. In one embodiment, the system 300may further include third logic stored in a second memory, such asdatabase management logic and associated data structures, and executableby a second processor to maintain the second account 108. In oneembodiment, the third exchange 104C is different from first and secondexchanges 104A, 104B. In an alternative embodiment, the third exchange104C may be the same as the first or second exchange 104A, 104B as wasdescribed above.

In one embodiment, the second account 108 is also a joint accountsimilar to the first account 106 wherein the second account 108 isfurther maintained by a fourth exchange 104D, the second plurality ofpositions further including positions resulting from a fourth one ormore trades executed on the fourth exchange 104D for one or moreproducts available from the fourth exchange 104D. As for the firstaccount 106, the second account 108 is maintained separately from otheraccounts 110C maintained by the third exchange which are only capable ofexclusively reflecting positions resulting from trades executed by thethird exchange 104C and the second account 108 is maintained separatelyfrom other accounts (not shown) maintained by the fourth exchange 104Dwhich are only capable of exclusively reflecting positions resultingfrom trades executed by the fourth exchange 104D.

The system 300 further includes a second net position calculator 308coupled with the second database 304 and operative to determine a secondnet position based on the second plurality of positions reflected in thesecond account 108, such as by recognizing intra-commodity spreadsand/or inter-commodity spreads. In one embodiment, the second netposition calculator 308 may be implemented as fourth logic, coupled withthe third logic, stored in the second memory and executable by thesecond processor to determine the second net position. In oneembodiment, the first net position calculator 306 and second netposition 308 calculator are further operative to determine the first andsecond net positions prior to the third net position calculator 314determining the third net position, as will be further described below.For example, the second net-position calculator 308 may include computerprogram logic operative to scan the data structure of a particularaccount and identify offsetting positions. Once identified the computerprogram logic of the second net-position calculator 308 computes thesecond net position based on the value of the identified offsettingpositions found in the data structure. As was described above, thesecond net position calculator 308 may operate periodically orcontinuously to determine the second net position.

The system 300 also includes a third net position calculator 314 coupledwith the first and second databases 302, 304 and operative to determinea third net position based on the first plurality of positions reflectedin the first account 106 and the second plurality of positions reflectedin the second account 108 by recognizing inter-exchange offsettablepositions in the accounts 106, 108. In one embodiment, the third netposition calculator 314 may in implemented as fifth logic, coupled withthe first logic and the third logic, stored in a third memory andexecutable by a third processor to determine the third net position. Inone embodiment, as has been described, the intra-account offsets, asdetermined by the first and second net position calculators 306, 308 arecomputed prior to the computation of the inter-exchange offsets by thethird net position calculator 314. In an alternative embodiment,inter-exchange offsets are recognized first. For example, wherein thefirst and second net position calculators 306, 308 may further determineone or more un-netted positions, the third net position calculator 314may be further operative to net these un-netted positions. For example,the third net-position calculator 314 may include computer program logicoperative to scan the data structures of a particular accounts andidentify offsetting positions. Once identified the computer programlogic of the third net-position calculator 314 computes the third netposition based on the value of the identified offsetting positions foundin the data structures. As was described above, the third net positioncalculator 314 may operate periodically or continuously to determine thethird net position.

The system 300 further includes rules 310, defined, in one embodiment,by contractual agreement among the participating exchanges 104A, 104B,104C, 104D, and, optionally, the market participant 102, to recognizeoffsetting positions therebetween. The third exchange 104C is coupledwith at least one of the first and second exchanges 104A, 104B via theplurality of rules 310 thereby establishing a relationship 116therebetween, the relationship being based on the plurality of rules310. In one embodiment, sixth logic stored in at least one of the firstmemory, the second memory, the third memory, or combinations thereof,and executable by the at least one of the first processor, the secondprocessor, the third processor, or combinations thereof, may implementthe rules 310 establish the relationship 116 between the third exchange104C and at least one of the first and second exchanges 104A, 104B.These rules 310 may, in part, define interface and data exchangeprotocols, such as an API, to allow intercommunication of the requisitedata between and among the participating exchanges 104A, 104B, 104C,104D to implement the disclosed cross-margining functionality.

The system 300 further includes a minimal margin calculator 312 coupledwith the first, second and third net positions calculators 306, 308, 314and operative to determine the minimal margin requirement 114 for themarket participant 102 based on the first, second and third netpositions and the relationship 116. In one embodiment, the minimalmargin calculator 312 may be implemented as seventh logic, such ascomputer program logic including the requisite computations forcalculating a margin requirement based on the various net positionsdetermined above, coupled with the second logic, the fourth logic, thefifth logic and the sixth logic, stored in at least one of the firstmemory, the second memory, the third memory, or combinations thereof,and executable by the at least one of the first processor, the secondprocessor, the third processor, or combinations thereof, to determinethe minimal margin requirement for the market participant 102. In oneembodiment, wherein the first net position calculator 306 is furtheroperative to determine a first margin requirement for the first accountand the second net position calculator 308 is further operative todetermine a second margin requirement for the second account, theminimal margin requirement 114 may not be more than the sum of the firstand second margin requirements, due to further inter-exchange offsettingthat may be available.

It will be appreciated that one or more of the processors, memories,logic and/or components described above may be combined or furthersub-divided into discrete components thereof, and that all suchimplementations, accomplishing the disclosed functionality, arecontemplated. Further, operation of the above components/functions maybe performed on a periodic or batch basis, such as at the close oftrading, and/or in real time continuously throughout the trading day orother window of time. Continuous operation would allow a marketparticipant to monitor their margin requirements with respect to changesin their accounts.

In one embodiment, the disclosed embodiments may operate as follows,assuming three participating exchanges, the first two exchangesutilizing the one bucket model and the third exchange participating withthe first two exchanges via the two bucket model: The one bucket modelmay be applied first, followed by the two bucket model with internalspreads in between. Assume, for this example, that a given marketparticipant holds a long 10 position from a first exchange and short 15position from a second exchange in their joint account. Executing theone bucket model first, the result is spread of 10 deltas with a deltaremaining of short 5 at the second exchange. Next, internal spreads atthe second exchange are applied. In particular, the second exchangetakes the short 5 resulting from the application of the one bucket modeland incorporates it into the second exchange's own internal spreading(intra or inter) processes. Assuming, the second exchange has a long 3position it can spread against, this results in an internal intra/interspread of 3 deltas for the second exchange and a delta remaining ofshort 2. Next, the two bucket model is applied. Assuming for thisexample that there are remaining 5 long deltas at a third exchange theare eligible for cross margin, the result of the application of the twobucket model is a spread of 2 deltas and a delta remaining of short 3 atthe third exchange. Alternatively, the above scenario can be implementedby performing internal spreads at the respective participatingexchanges/clearing organizations, followed by the two bucket model andthen the one bucket model thereafter. Further, in yet other alternativeimplementations the one bucket model can be applied prior to the twobucket model, or vice versa, with internal spreads being skippedaltogether.

It is therefore intended that the foregoing detailed description beregarded as illustrative rather than limiting, and that it be understoodthat it is the following claims, including all equivalents, that areintended to define the spirit and scope of this invention.

1. A computer implemented method for determining a minimum marginrequirement for a market participant, the method comprising:maintaining, by a first processor associated with at least twoexchanges, an inter-exchange account for the market participant, theinter-exchange account reflecting a plurality of positions resultingfrom one or more trades executed on either of the at least two exchangesfor one or more products available therefrom, the inter-exchange accountbeing maintained separately from an intra-exchange account for themarket participant, maintained by one of the at least two exchanges,exclusively reflecting a plurality of positions resulting from tradesexecuted on that exchange for one or more products available therefrom;determining, by a second processor, an inter-account net position basedon the plurality of positions reflected in the intra-exchange accountand un-netted positions remaining after a first intra-account netposition has been determined, by the second processor, based solely onthe plurality of positions reflected in the inter-exchange account;establishing, by one or more of the first or second processors, arelationship between the at least two exchanges; and determining, by oneor more of the first or second processors, the minimum marginrequirement for the market participant based on the inter-account andfirst intra-account net positions and the relationship.
 2. The computerimplemented method of claim 1 further comprising: determining a secondintra-account net position based solely on the plurality of positionsreflected in the intra-exchange account prior to determining theinter-account net position wherein the inter-account net position isdetermined based on the un-netted positions remaining after the secondintra-account net position has been determined and the un-nettedpositions remaining after the first intra-account net position has beendetermined.
 3. The computer implemented method of claim 1, wherein atleast a subset of the plurality of positions reflected in theinter-exchange account and at least a subset of the plurality ofpositions reflected in the first intra-exchange account arecharacterized by a marginable correlation.
 4. The computer implementedmethod of claim 1 wherein the inter-exchange account is limited toreflecting positions resulting from cross-margin eligible trades.
 5. Thecomputer implemented method of claim 1 wherein the inter-exchangeaccount is maintained by a virtual exchange.
 6. The computer implementedmethod of claim 1 further comprising transferring one or more of theplurality of positions reflected in the inter-exchange account to theintra-exchange account.
 7. The computer implemented method of claim 1wherein the determining of the inter-account net position furthercomprises determining a first margin requirement for the inter-exchangeaccount and the determining of the intra-account net position furthercomprises determining a second margin requirement for the intra-exchangeaccount, wherein the minimum margin requirement is not more than the sumof the first and second margin requirements.
 8. The computer implementedmethod of claim 1 wherein the determining of the intra-account netposition, further comprises recognizing intra-commodity spreads andinter-commodity spreads with respect to one of the at least twoexchanges.
 9. The computer implemented method of claim 1 wherein therelationship comprises a contractual relationship among the at least twoexchanges to recognize offsets between the inter-exchange andintra-exchange accounts.
 10. A system for determining a minimum marginrequirement for a market participant, the system comprising: aninter-exchange account stored in a first database for the marketparticipant, the inter-exchange account reflecting a plurality ofpositions resulting from one or more trades executed on either of the atleast two exchanges for one or more products available therefrom, theinter-exchange account being maintained separately from anintra-exchange account for the market participant, maintained by one ofthe at least two exchanges, exclusively reflecting a plurality ofpositions resulting from trades executed on that exchange for one ormore products available therefrom; an inter-account net positioncalculator coupled with the first database and operative to determine aninter-account net position based on the plurality of positions reflectedin the intra-exchange account and un-netted positions remaining after anintra-account net position calculator has determined a firstintra-account net position based solely on the plurality of positionsreflected in the inter-exchange account; wherein one of the at least twoexchanges is coupled with the other of the at least two exchanges viaplurality of rules which establish a relationship therebetween, therelationship being based on the plurality of rules; and a minimum margincalculator coupled with the inter-account and intra-account net positioncalculators and operative to determine the minimum margin requirementfor the market participant based on the inter-account and firstintra-account net positions and the relationship.
 11. The system ofclaim 10, wherein the intra-account net position calculator is furtheroperative to determine a second intra-account net position based solelyon the plurality of positions reflected in the intra-exchange accountprior to determination of the inter-account net position by theinter-account net position calculator wherein the inter-account netposition calculator is further operative to determine the inter-accountnet position based on the un-netted positions remaining after the secondintra-account net position has been determined and the un-nettedpositions remaining after the first intra-account net position has beendetermined.
 12. The system of claim 10, wherein at least a subset of theplurality of positions reflected in the inter-exchange account and atleast a subset of the plurality of positions reflected in the firstintra-exchange account are characterized by a marginable correlation.13. The system of claim 10, wherein the inter-exchange account islimited to reflecting positions resulting from cross-margin eligibletrades.
 14. The computer implemented method of claim 1 wherein theinter-exchange account is maintained by a virtual exchange.
 15. Thesystem of claim 10 further comprising a position transmitter operativeto transfer one or more of the plurality of positions reflected in theinter-exchange account to the intra-exchange account.
 16. The system ofclaim 10 wherein the inter-account net position calculator is furtheroperative to determine a first margin requirement for the inter-exchangeaccount and the intra-account net position calculator is furtheroperative to determine a second margin requirement for theintra-exchange account, wherein the minimum margin requirement is notmore than the sum of the first and second margin requirements.
 17. Thesystem of claim 10 wherein the intra-account net position calculator isfurther operative to recognize intra-commodity spreads andinter-commodity spreads with respect to one of the at least twoexchanges.
 18. The system of claim 10 wherein the relationship comprisesa contractual relationship among the at least two exchanges to recognizeoffsets between the inter-exchange and intra-exchange accounts.
 19. Asystem for determining a minimum margin requirement for a marketparticipant, the system comprising: means for maintaining, by at leasttwo exchanges, an inter-exchange account for the market participant, theinter-exchange account reflecting a plurality of positions resultingfrom one or more trades executed on either of the at least two exchangesfor one or more products available therefrom, the inter-exchange accountbeing maintained separately from an intra-exchange account for themarket participant, maintained by one of the at least two exchanges,exclusively reflecting a plurality of positions resulting from tradesexecuted on that exchange for one or more products available therefrom;means for determining an inter-account net position based on theplurality of positions reflected in the intra-exchange account andun-netted positions remaining after a first intra-account net positionhas been determined based solely on the plurality of positions reflectedin the inter-exchange account; means for establishing a relationshipbetween the at least two exchanges; and means determining the minimummargin requirement for the market participant based on the inter-accountand first intra-account net positions and the relationship.
 20. A systemfor determining a minimum margin requirement for a market participant,the system comprising: a processor; a memory coupled with the processor;first logic stored in the memory and executable by the processor tomaintain an inter-exchange account stored in a first database for themarket participant, the inter-exchange account reflecting a plurality ofpositions resulting from one or more trades executed on either of the atleast two exchanges for one or more products available therefrom, theinter-exchange account being maintained separately from anintra-exchange account for the market participant, maintained by one ofthe at least two exchanges, exclusively reflecting a plurality ofpositions resulting from trades executed on that exchange for one ormore products available therefrom; second logic, coupled with the firstlogic, stored in the memory and executable by the processor to determinean inter-account net position based on the plurality of positionsreflected in the intra-exchange account and un-netted positionsremaining after a first intra-account net position has been determinedbased solely on the plurality of positions reflected in theinter-exchange account; wherein one of the at least two exchanges iscoupled with the other of the at least two exchanges via plurality ofrules which establish a relationship therebetween, the relationshipbeing based on the plurality of rules; and third logic, coupled with thefirst and second logic, stored in the memory and executable by theprocessor to determine the minimum margin requirement for the marketparticipant based on the inter-account and first intra-account netpositions and the relationship.